Activist investor Starboard sent another blistering letter to Yahoo lambasting its management

Starboard, the activist hedge fund that is a Yahoo shareholder,
has delivered yet
another letter to the digital media company's board of
directors, calling for "significant changes" (read the letter in
full below).

Starboard — which owned 0.75% of Yahoo as of September 30 and is
the company's 23rd-largest shareholder — says it believes Yahoo
shareholders have lost confidence in the ability of current
management.

In summary, Starboard says "it is time for the board to accept
that significant changes are needed" to Yahoo's management, board
composition, strategy, and execution.

When reached for comment a Yahoo spokesperson told Business
Insider:

"Yahoo is in the midst of a multiyear transformation. We
attract more than a billion people every month and we've built a
profitable, billion dollar business in mobile, video, native and
social that we expect will drive sustainable growth. We will
share additional plans for a more focused Yahoo on or before our
Q4 earnings call. Our board and management team engage in
and maintain regular, open dialogue with all our shareholders,
and consistently strive to deliver and to maximize shareholder
value."

Reuters reported on Tuesday that the pressure on Yahoo to
sell its core business was mounting. Several Yahoo investors with
"significant stakes" are concerned Yahoo's core business could
start rapidly losing value, so they want it sold off immediately,
according to Reuters.

The past year has been an extremely frustrating one for
shareholders of Yahoo! Inc. ("Yahoo" or the "Company"). We are
sure that you, the Board of Directors (the "Board"), must also be
frustrated. Despite reasonable intentions, in the end, the
proposed spin-off of Yahoo's stake in Alibaba Group Holding
Limited ("Alibaba") into Aabaco Holdings, Inc. ("Aabaco") turned
out to be a failed effort due to a changing tax landscape and
serious concerns over the potential for massive tax liability. We
believe you ultimately made the right decision by suspending the
spin-off of Aabaco. Also frustrating for us, and likely for you,
has been the continued downward spiral of the operating and
financial performance of Yahoo's core Search and Display
advertising businesses (the "Core Business"). Despite over three
years of effort and billions spent on acquisitions, the
management team that was hired to turn around the Core Business
has failed to produce acceptable results, in turn, causing
massive declines in profitability and cash flow.

It appears that investors have lost all confidence in management
and the Board. As of Tuesday's close, the value of the "Yahoo
Stub" (defined as Yahoo's market value less the value of its
shares in Alibaba) has collapsed and is currently trading near
zero. The bulk of Yahoo's current market value almost entirely
derives from an extraordinary investment Yahoo made over ten
years ago in Alibaba, and the good fortune that Alibaba's
management team has executed well such that this investment today
is worth over $30 billion. This compares to Yahoo's current
market capitalization of approximately $30.5 billion.

The current valuation of Yahoo implies either a massive tax
liability on Yahoo's minority equity interests in Alibaba and
Yahoo Japan Corporation ("Yahoo Japan") or that the remaining
operating assets of Yahoo are worthless, or some combination of
the two. While we agree that the failed separation has been
frustrating, we are confident that a separation of these assets
can be accomplished through either a sale of the Core Business or
a spin of the Core Business. Either of these outcomes would
result in a much more tax efficient separation than the market
currently implies. Unfortunately, it appears that shareholders
have no confidence that management and the Board will be able to
execute on a separation of these assets or improve the
performance of the Core Business. We are confident that both of
these objectives are achievable, but will require a change in
leadership and strategy.

Yahoo's current management has had over three years to
demonstrate progress towards improving the Core Business, but
despite these efforts, the Core Business continues to be plagued
with deteriorating financial performance and an accelerating
number of executive leadership departures. Annual operating costs
have ballooned, increasing by approximately $500 million despite
revenue that has been declining. In addition, the Company has
spent over $2.3 billion on acquisitions. Unfortunately, most of
these investments have been misguided, poorly overseen, and,
ultimately, shut down. Even with these massive investments, the
trajectory is decidedly negative. As shown in the table below,
EBITDA continues to decline quarter-after-quarter while spending
continues at an alarming pace.

If nothing else, the results of the past three years, which
follow several other failed attempts to turnaround the business
theretofore, should demonstrate to you that turning around this
business is extremely difficult. To be successful, dramatically
different thinking is required, together with significant changes
across all aspects of the business starting at the board level,
and including executive leadership. New leadership will have to
develop and implement a plan to balance priorities between growth
and profitability. This will mean prioritizing and investing in
certain parts of the business while at the same time deeply
reducing unnecessary costs, selling or exiting many unprofitable
businesses and research projects, and overhauling the incentives
and compensation programs to instill sound business behavior.

Over the past 13 years, we have been involved in similar
turnaround efforts with many of our portfolio companies.
Certainly on paper, there could be a viable plan to significantly
restructure Yahoo, shift direction under new leadership and
attempt, once again, to reverse the current trends of declining
revenues, increasing costs, and plummeting profits. We, and you,
understand that businesses are not operated on paper and that
leadership skill and experience is required for complex
turnarounds as well as day-to-day management. We understand that
executing such a significant restructuring at an extremely high
profile public company while reporting quarterly results is
challenging. That is why it is necessary for the Board to remain
open-minded regarding the future of Yahoo. The Board must be able
to assess and compare a stand-alone spin-off and restructuring of
the Core Business, as described above, versus the value that
could be received today through a competitive sale process
resulting in a sale of the Core Business to a strategic or
financial buyer.

We are highly confident that there are interested and credible
buyers for Yahoo's Core Business. It is our understanding that
even after Yahoo announced its plan to spin-off, instead of sell,
the Core Business, several interested parties subsequently
reached out to Yahoo's management and Board expressing interest
in buying the Core Business. Yet, unfortunately, according to
several credible media reports, Yahoo has thus far ignored this
inbound interest. This is highly concerning to us because when
recently asked specifically on CNBC, Maynard Webb, Yahoo's
Chairman, stated that if Yahoo received inbound interest from
potential strategic or financial buyers the Board would engage
with those parties:

"The Board has fiduciary obligation to engage with any legitimate
person that comes forward with a good offer. The Board will
always do its fiduciary obligations when something like that
occurs." - Maynard Webb, December 9, 2015

This is unacceptable. By making the above statement, while
simultaneously ignoring serious interest, you are sending
potentially destructive mixed messages. In order to ensure the
best possible outcome for shareholders, it is imperative that you
clearly communicate your receptiveness to discussions with
parties who demonstrate an interest in an acquisition of the Core
Business. Those parties can then confidently commit the time
needed to make a bid. Only in this way can you truly compare the
potential value received in a sale of the Core Business versus a
substantial stand-alone restructuring of the Core Business.

For over a year, we have attempted to work constructively with
management and the Board of Yahoo. We have tried extremely hard
to work "behind the scenes." We have grown increasingly
frustrated. It took significant effort for us to convince you it
was the right choice to suspend the Aabaco spin-off.
Unfortunately, instead of heeding our advice and concurrently
announcing that you would explore a sale of the Core Business,
you have now hid behind a plan to spin-off the Core Business and
Yahoo Japan without fully understanding the alternative options.
We have had numerous conversations with you for over a year where
we expressed our extreme concern with the trajectory of the Core
Business. We told you that, aside from separating the minority
equity interests, the performance and lack of turnaround
execution on the Core Business was our primary concern and focus.
You assured us for over a year that you had a plan for execution
and that you were confident that 2014 would be a low point for
EBITDA. We explained over and over again that we did not believe
your actions, or lack thereof, would achieve the desired result
of stabilizing the business. Unfortunately, it appears we have
been right, and each quarter is worse than the last. Your
solution to just announce a change in direction of the spin and
that it will require another year for shareholders to wait while
the existing leadership continues to destroy value is not
acceptable.

The Board must accept that significant changes are desperately
needed. This would include changes in management, changes in
Board composition, and changes in strategy and execution. If the
Board is willing to embrace the need for significant change and
pursue a strategy along the lines of what we have proposed above,
we are hopeful we can work constructively together and make
changes to the Board through a mutually agreeable resolution.
This is clearly the preferable route. If the Board is unwilling
to accept the need for significant change, then an election
contest may very well be needed so that shareholders can replace
a majority of the Board with directors who will represent their
best interests and approach the situation with an open mind and a
fresh perspective. The new Board can then assess the state of the
existing business, including a review of management's strengths
and weaknesses, so that the Board can best represent shareholders
in analyzing a viable turnaround plan compared with potential
offers for the Core Business. We look forward to our continued
discussions.